Historically, ATO interest charges, such as General Interest Charges (GIC) and Shortfall Interest Charges (SIC), have been tax deductible for businesses and individuals. These charges often arise from underpaid tax, late payments, or adjustments to prior tax returns.
However, from 1 July 2025, ATO interest charges will no longer be eligible for tax deductions. This means businesses and individuals will bear the full cost of these charges without the benefit of reducing their taxable income.
Why Is This Change Being Introduced?
The decision to remove the deductibility of ATO interest aligns with the government’s broader efforts to encourage timely tax compliance. By eliminating the tax advantage associated with ATO interest, the measure aims to promote more proactive financial management and timely payment of tax obligations.
What This Means for Businesses and Individuals
1. Paying More Tax
ATO interest charges will hit cash flow and profits harder. Businesses will need to adjust their budgets since they can no longer rely on tax deductions to soften the blow.
2. More Focus on Tax Planning
With bigger financial impacts, it’s more important than ever to stay on top of tax reporting and manage finances carefully.
3. Reconsider Borrowing Choices
Businesses may need to rethink how they borrow money to cover tax bills due to the higher cost of ATO interest. We confirm that the non-deductibility of interest expense only applies to ATO forms of interest, and not to other forms of external finance, such as from banks or suppliers.
Example
The following table outlines the impact of this change on the tax position on small to medium trading companies.
| Dates Applicable | Prior to 1 July 2025 | 1 July 2025 onwards |
| ATO Interest Charges | $10,000 | $10,000 |
| Taxable Deductible Interest | $10,000 | Nil |
| Tax Benefit @ 25% | $2,500 | Nil |
For every $10,000 in ATO interest charges, small to medium trading companies will lose a tax benefit of $2,500.
Preparing for the Change
1. Review Your Tax Payments
Be aware of your upcoming tax liabilities.
2. Manage Cash Flow Better
Review how you handle cash to ensure you’ve got enough set aside for tax payments. Setting up a tax savings account could help.
3. Plan Ahead
Start preparing now for the changes coming on 1 July 2025. Factor these costs into your budget to avoid surprises later.
4. Changing Tax Registration Cycles
Opt in to pay GST and PAYG Withholding monthly, to reduce large quarterly tax bills. We note that some entities may already be required to lodge and pay monthly by law.
Final Thoughts
The upcoming non-deductibility of ATO interest represents a fundamental shift in the tax framework, placing a greater emphasis on timely compliance and proactive cash flow planning. By understanding the implications and preparing early, businesses and individuals can minimise the impact of this change.
If you would like to understand more about how this change may affect your specific circumstances, we can assist in reviewing your current strategies and identifying opportunities for improvement. Contact us to find out more.